The M&A market in Vietnam since the beginning of this year is very active. Foreign investors tend to invest in public listed companies or companies with good brand in the market. Sectors that attract the most interest of foreign investors are finance, real estate, retail, consumer goods, etc.
The reason is that the investors are very optimistic about the development of Vietnam’s market. In addition, the Government has also made several successful attempts to improve the investment environment, including the consideration for the amendment of the Law on Securities, which is believed to bring better financial sources to the country.

2. What should foreign investors benefit from the trends and what should they be aware of?

The Government’s privatization of many state-owned enterprises this year together with the fact that many enterprises with large capitalization and of great interest to foreign investors in these sectors are now preparing for the public listing give foreign investors more investment choices. However, they should conduct a full due diligence on the target to make sure that their investment is secured and in compliance with Vietnam laws.

3. What are still the shortcomings of the M&A deals in Vietnam?

Transparency is a barrier to foreign investors. The local target companies do not adopt international accounting standards or the equivalent, or are not willing to disclose sensitive information to their potential partners. In certain cases, for example, in real estate development projects, under table expenses are of great concern to foreign investors, especially those from the US, EU, UK, Japan and Korea.

4. Many people keep worry of the loss for not only local brands but also the local culture with more foreign domination after the M&A. What are your opinions about the matter?

It should not be of great concern. Foreign investors when buying in local companies/ brands usually bring technology, high-quality management standards and capital, which local companies lack. This helps the local companies/ brands better compete in the market, especially in case of Vietnam’s deep integration into the world and regional economy. Moreover, culture is something that foreign investors have to adapt to be able to survive in Vietnam. The case of Grab and Uber is an example.
5. What is the forecast of the trend in the future? And how they will drive the market?

Leading enterprises with good financial capacity and high growth in the sectors will attract both foreign and domestic investment. It is noted that in 2018, there will be a number of state-owned enterprises privatized under the Prime Minister’s decision. These enterprises include Habeco, Vinamilk, etc. which is believed to be successfully privatized following the recent success of Sabeco, another state-owned enterprise in the beverage sector under the Ministry of Industry and Trade’s management.
In terms of capital sources, we can expect a cash flow coming from major Asian economies such as Japan, Korea, Singapore, Hong Kong and especially mainland China which increases their strong presence in the market.
We strongly believe that the equitisation of SOEs of a larger scale and with a strong determination from the top would play a key role in driving the market.

If you have any question on the above, please do not hesitate to contact Dr. Oliver Massmann under omassmann@duanemorris.com or any other lawyer in our office listing. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Vietnam has remained an attractive destination for foreign investors. In 2017, the total FDI capital to Vietnam is USD35.88 billion, an increase of 44.4% compared to last year. Out of USD35.88 billion FDI, USD6.19 billion came from 5,002 M&A deals, up 45.1% against last year.
Real estate continues being a very attractive sector, with USD1.5 billion being poured into the market via M&A, setting the record this year. Residential remains one of the most attractive segments and more interest is also put on commercial segment, especially Grade A offices. Main investors still come from Japan, Korea, Singapore, and China. The retail, consumer goods, and industrial goods are also very active, and investors tend to focus on leading companies as they have a big market share and strong brand value.
Main drivers of Vietnam’s M&A market are:
• Privatization of state-owned enterprises. It is forecast that there will be around 8-10 big privatization deals in 2018, including the sale of 24.86% shares of Petrolimex, 20% shares of Aviation Corporation of Vietnam, 53.48% state shares in Vietnam Textile Group, 57.92% state shares in Vietnam Steel Corporation and 49% of PV Oil. Hanel, Viglacera, Lilama are also in the list for privatization.
• Trade liberalization as a result of CPTPP, EU- Vietnam FTA, etc.
• Resolution No. 42 on pilot program of handling bad debts of credit institutions is also the main driving force of M&A in real estate sector as bad debts in real estate sectors accounts for a high percentage of the total bad debts in Vietnam’s market.
Notable deals in 2017 include the following:
• The market in 2017 sees several M&A deals in state-owned enterprises where the privatization is pushed hard by the Government. Vietnam Beverage – a company of a Thai billionaire managing ThaiBev buying more than 53% shares in Sabeco – a company owned by the Ministry of Industry and Trade at USD 5 billion, is the most notable and successful privatization deal this year.
• In December 2017, Shinhan Bank Vietnam Ltd. (“Shinhan Bank Vietnam”) acquired ANZ Bank (Vietnam) Limited’s retail business. This successful transaction has been considered as a big step for Shinhan Bank Vietnam’s development in Vietnam market, as well as a rapid growth for Vietnam retail banking in the upcoming time.
• In mid- November 2017, Jardine Cycle & Carriage Limited (JC&C), via Platinum Victory Pte. Ltd bought 5.53% shares of Vinamilk at USD616.6 million.
• In June 2017, Alibaba Group additionally bought shares of Lazada at USD1 billion, thus increasing its shares in Lazada to 83%
• In July 2017, Sea Limited (Singapore) bought 82% shares of Foody Corporation at USD64 million
• In November 2017, JD.com bought shares in Tiki JSC at USD 44 million
• In January 2018, Creador (a private Kula Lumpur-based investment fund) bought 35% shares of Mobile World Investment JSC at USD43 million.
• Synnex Technology International bought 30% shares of FPT Retail and 47% shares of FPT Trading from FPT Corporation at around USD 41 million.
• Shinhan cooperated with Vinacapital to invest USD100 million in Novaland.
How to obtain control of a public company
The most common means of obtaining control over a public company are as follows:
o The acquisition of shares/charter capital through:
o buying shares/charter capital from the existing shareholders of the company;
o buying shares/charter capital of a listed company on the stock exchange; and
o public share purchase offer.
o Through a merger. The 2014 Law on Enterprises sets out the procedures for company mergers by way of a transfer of all lawful assets, rights, obligations and interests to the merged company, and for the simultaneous termination of the merging companies.
o Through the acquisition of assets.
There are restrictions on the purchase of shares/charter capital of local companies by foreign investors in certain sensitive sectors. In addition, the law is silent on merger or assets acquisition (e.g., business spin-off) transactions where a foreign investor is a party. Regarding other assets acquisition transactions, if the asset is a real property, foreign ownership right will be restricted according to real estate laws.
Securities of public companies must be registered and deposited at the Vietnam Securities Depository Centre before being traded.
Depending on the numbers of shares purchased, an investor can become a controlling shareholder. Under the Vietnam Law on Securities, a shareholder that directly or indirectly owns 5% or more of the voting shares of an issuing organization is a major shareholder. Any transactions that result in more than 10% ownership of the paid-up charter capital of the securities company must seek approval of the State Securities Commission (SSC).
What a bidder generally questions before making a bid
Before officially contacting the potential target, the bidder conducts a preliminary assessment based on publicly available information. The bidder then contacts the target, expresses its intention of buying shares/subscribing for its shares and the parties sign a confidentiality agreement before the due diligence process. The confidentiality agreement basically includes confidentiality obligations in performing the transaction. The enforcement of confidentiality agreements by courts in Vietnam remains untested.
A bidder’s legal due diligence usually covers the following matters:
• Corporate details of the target and its subsidiaries, affiliates and other companies that form part of the target.
• Contingent liabilities (from past or pending litigation).
• Employment matters.
• Contractual agreements of the target.
• Statutory approvals and permits regarding the business activities of the target.
• Insurance, tax, intellectual property, debts, and land-related issues.
• Anti-trust, corruption and other regulatory issues.
Restrictions on shares transfer of key shareholders
Founding shareholders can only transfer their shares to other founding shareholders of the company within three years from the issuance of the Enterprise Registration Certificate. After then, the shares can be transferred freely. An internal approval of the general meeting of shareholders is always required if:
• The company increases its capital by issuing new shares.
• There is any share transfer of the founding shareholders within the above three-year period.
If the sale and purchase is a direct agreement between the company and the seller in relation to an issuance of shares, the selling price must be lower than the market price at the time of selling, or in the absence of a market price, the book value of the shares at the time of the approval plan to sell the shares. In addition, the selling price to foreign and domestic buyers must be the same.
When a tender offer is required
A tender offer is required in the following cases:
• Purchase of a company’s circulating shares that results in a purchaser, with no shareholding or less than a 25% shareholding, acquiring a 25% shareholding or more.
• Purchase of a company’s circulating shares that results in a purchaser (and affiliated persons of the purchaser), with a 25% or more shareholding, acquiring a further 10% or more of circulating shares of the company.
• Purchase of a company’s circulating shares that results in a purchaser (and affiliated persons of the purchaser), with a 25% shareholding or more, acquiring a further 5% up to 10% of currently circulating shares of the company within less than one year from the date of completion of a previous offer.
There is no guidance on building a stake by using derivatives. In addition, the bidder cannot purchase shares or share purchase rights outside the offer process during the tender offer period.
The bidder must publicly announce the tender offer in three consecutive editions of one electronic newspaper or one written newspaper and (for a listed company only) on the relevant stock exchange within seven days from the receipt of the State Securities Commission’s (SSC’s) opinion regarding the registration of the tender offer. The tender offer can only be implemented after the SSC has provided its opinion, and following the public announcement by the bidder.
Making the bid public
The offer timetable is as follows:
• The bidder prepares registration documents for its public bid to purchase shares.
• The bidder sends the bid registration documents to the SSC for approval and, at the same time, sends the registration documents to the target.
• The SSC reviews the tender documents within seven days.
• The board of the target must send its opinions regarding the offer to the SSC and the shareholders of the target within 14 days from receipt of the tender documents.
• The bid is announced in the mass media (although this is not a legal requirement).
• The length of the offer period is between 30 and 60 days.
• The bidder reports the results of the tender to the SSC within 10 days of completion.
Companies operating in specific sectors (such as banking, insurance, and so on) can be subject to a different timetable.
Offer conditions
A takeover offer usually contains the following conditions:
• The terms and conditions of the offer apply equally to all shareholders of the target.
• The relevant parties are allowed full access to the tender information.
• The shareholders have full rights to sell the shares.
• Applicable laws are fully respected.
An offer can also be subject to conditions precedent. Conditions precedent are set out in the share sale and purchase agreement or the capital contribution transfer agreement. There is no specific restriction on conditions precedent other than the requirement that they cannot be contrary to law and conflict with social ethics (although the legal definition of social ethics is unclear). The most common conditions precedent are:
• Amendments to the charter/relevant licence of the target.
• Obtaining necessary approvals to conduct the transaction.
• Changes to the target’s management body.
Payment of the contract price will only be made after the conditions precedent are met.
Employee consultation
There is no requirement under Vietnamese law that the employees must be consulted about the offer. However, if a layoff is to be conducted, the employer must:
• Prepare a labour usage plan.
• Consult with the employee representative.
• Notify the competent labour authority on the implementation of the labour usage plan.
When a tender offer is required?
A tender offer is required in the following cases:
• Purchase of a company’s circulating shares that results in a purchaser, with no shareholding, or less than a 25% shareholding, acquiring a 25% shareholding.
• Purchase of a company’s circulating shares that results in a purchaser (and affiliated persons of the purchaser), with a 25% or more shareholding, acquiring a further 10% or more of circulating shares of the company.
• Purchase of a company’s circulating shares that results in a purchaser (and affiliated persons of the purchaser), with a 25% shareholding or more, acquiring a further 5% up to 10% of currently circulating shares of the company within less than one year from the date of completion of the previous offer.
Form of consideration and minimum level of consideration
Under Vietnamese law, shares can be purchased by offering cash, gold, land use rights, intellectual property rights, technology, technical know-how or other assets. In practice, acquisitions are most commonly made for cash consideration.
In cases of full acquisition of state-owned enterprises, the first payment for the share purchase must not be less than 70% of the value of such shares, with the remaining amount being paid within 12 months.
In transactions involving auctions of shares by state-owned enterprises, the purchaser must make a deposit of 10% of the value of the shares registered for subscription based on the reserve price at least five working days before the auction date included in the target company’s rule. Additionally, the purchaser must transfer the entire consideration for the shares into the bank account of the body conducting the auction within ten working days of the announcement of the auction results.
In the case of a public tender offer, the payment and transfer of shares via a securities agent company appointed to act as an agent for the public tender offer must comply with Decree 58/2012/ND-CP.
Delisting a company
If a company seeks voluntarily de-listing, it must submit an application for de-listing that includes the following documents:
• A request for de-listing.
• For a joint stock company:
o the shareholders’ general meeting approval of de-listing of the stock;
o the board of directors’ approval of de-listing of bonds; and
o the shareholders’ general meeting approval of de-listing of convertible bonds.
• The members’ council (for a multi-member limited liability company) or the company’s owner (for a single member limited liability company) approval of de-listing of bonds.
• For a securities investment fund, the investors’ congress approval of de-listing of the fund’s certificate.
• For a public securities investment company, the shareholders’ general meeting approval of stock de-listing.
A listed company can only de-list its securities if de-listing is approved by a decision of the general meeting of shareholders passed by more than 50% of the voting shareholders who are not major shareholders.
If a company voluntarily de-lists from the Hanoi Stock Exchange or Ho Chi Minh Stock Exchange, the application for de-listing must also include a plan to deal with the interests of shareholders and investors. The Hanoi Stock Exchange or Ho Chi Minh Stock Exchange must consider the request for de-listing within ten and 15 days from the receipt of a valid application, respectively.
Transfer duties payable on the sale of shares in a company
Depending on whether the seller is an individual or a corporate entity, the following taxes will apply:
• Capital gains tax. Capital gains tax is a form of income tax that is payable on any premium on the original investor’s actual contribution to capital or its costs to purchase such capital. Foreign companies and local corporate entities are subject to a corporate income tax of 20%. However, if the assets transferred are securities, a foreign corporate seller is subject to corporate income tax of 0.1% on the gross transfer price.
• Personal income tax. If the seller is an individual resident, personal income tax will be imposed at the rate of 20% of the gains made, and 0.1% on the sales price if the transferred assets are securities. An individual tax resident is defined as a person who:
o stays in Vietnam for 183 days or longer within a calendar year;
o stays in Vietnam for a period of 12 consecutive months from his arrival in Vietnam;
o has a registered permanent residence in Vietnam; or
o rents a house in Vietnam under a lease contract of a term of at least 90 days in a tax year.
If the seller is an individual non-resident, he is subject to personal income tax at 0.1% on the gross transfer price, regardless of whether there is any capital gain.
Payment of the above transfer taxes is mandatory in Vietnam.
Regulatory approvals
The investor will need to register the capital contribution and purchase of shares if either:
• The target is operating in one of the 267 conditional sectors referred to in the 2015 Investment Law.
• The capital contribution and purchase of shares results in foreign investors owning 51% or more of the target’s charter capital (in particular, from below 51% to more than 51% and from 51% to above 51%).
The local Department of Planning and Investment where the target is located must issue its final approval within 15 days from the receipt of a valid registration application. However, in practice, this procedure can take several months due to the workload of certain central authorities and the lack of clear guidance documents. Therefore, the registration requirement can cause substantial delays to the whole M&A process.
In other cases, the target company only needs to register change of membership / shareholders at the Business Registration Division.
Restrictions on repatriation of profits and/ or foreign exchange rules for foreign companies
If the target company in Vietnam already has an investment registration certificate, it must open a direct investment capital account at a licensed bank in Vietnam. Payment for a share purchase by a foreign investor must be conducted through this account. The account can be denominated in Vietnamese dong or a foreign currency. In addition, if the foreign investor is an offshore investor, it will also need to open a capital account at a commercial bank operating in Vietnam to carry out the payment on the seller’s account and receive profits.
If the target company in Vietnam does not have an investment registration certificate, the foreign investor will need to open an indirect investment capital account for payment to the seller and remittance of profits.
***
Please do contact the author Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Largest / most noteworthy public M&A transactions in the past 12 months
Oil gas and chemicals
In May 2017, Earth Chemical bought 100% stake in A My Gia Joint Stock Company at about USD79.2 million.
Financial
In July 2017, Vietnam International Joint Stock Commercial Bank bought 100% business of Commonwealth Bank of Australia (Ho Chi Minh Branch).
In December 2017, Shinhan Bank Vietnam Ltd. (“Shinhan Bank Vietnam”) acquired ANZ Bank (Vietnam) Limited’s retail business. This successful transaction has been considered as a big step for Shinhan Bank Vietnam’s development in Vietnam market, as well as a rapid growth for Vietnam retail banking in the upcoming time.
Other
Retail. Noteworthy public M&A deals include the following:
• In January 2018, Creador (a private Kula Lumpur-based investment fund) bought 35% shares of Mobile World Investment JSC at USD43 million.
• ThaiBev buying more than 53% shares in Sabeco – a company owned by the Ministry of Industry and Trade at USD 5 billion.
• In November 2017, JD.com bought shares in Tiki JSC at USD 44 million.
• In June 2017, Alibaba Group additionally bought shares of Lazada at USD1 billion, thus increasing its shares in Lazada to 83%.
• In July 2017, Sea Limited (Singapore) bought 82% shares of Foody Corporatio at USD64 million.
• In April 2017, Shinhan Vietnam Bank bought the retail business of ANZ at an undisclosed value.
• In May 2017, Bien Hoa Sugar Company and Thanh Thanh Cong Tay Ninh Sugar Company bought 100% charter capital of HAGL Sugar at about USD58.52 million.
• Synnex Technology International bought 30% shares of FPT Retail and 47% shares of FPT Trading from FPT Corporation at around USD 41 million.
Food. Noteworthy deals include the following:
• In mid- November 2017, Jardine Cycle & Carriage Limited (JC&C), via Platinum Victory Pte. Ltd bought 5.53% shares of Vinamilk at USD616.6 million.
• In late March 2017, CJ Cheiljedang Corporation bought 20% stake in Saigon Trading Corporation at USD8.2 million, bringing its total ownership in Cau Tre Export Products Processing Joint Stock Company to 71.6%.
• In May 2017, Kido Corporation bought 27% stake in Vietnam Vegetable Oil Industry Corporation, bringing its total ownership in the company to 51%.
Real estate. Noteworthy deals include the following:
• Warburg Pincus in joint venture with VinaCapital bought 50% shares in Sofitel Legend Metropole Hanoi at about USD100 million.
• Warburg also established a joint venture with Becamex Industrial Development Corporation to invest in industrial real estate and logistics services with a capital of USD200 million.
• In May 2017, Elite Capital Resources Limited bought 100% shares of VinaLand Fund (VinaCapital) in Thang Long Limited Company (project owner of Times Square Hanoi) at USD41 million.
• In the first quarter of 2017, Sulyna Hospitality bought 70% stake in a 4-start resort in Phu Quoc from Berjaya Land at USD14.65 million.
• In the first quarter of 2017, An Gia Investment Corporation and its partner Creed Group bought 5 apartment blocks of La Casa Project of Van Phat Hung Corporation at about USD40 million.
• In March 2017, Keppel Corporation increased its shares in Saigon Centre project ato 16% at USD37 million.
• In January 2017, CapitaLand announced the purchase of 90% stake in CapitaLand Thanh Nien.
• Shinhan cooperated with Vinacapital to invest USD100 million in Novaland
Insurance. Noteworthy deals include the following:
• In April 2017, Aviva Insurance Corporation bought 50% stake of VietinBank Aviva Joint Venture Company from Vietnam Joint Stock Commercial Bank for Industry and Trade.
The major trends in the structuring of public M&A transactions
In Vietnam, M&A transactions usually take the form of either share or asset acquisitions, with share acquisition transactions outnumbering asset acquisition transactions.
Share acquisitions by foreign purchasers are commonly structured as offshore direct investments. The new investor can:
• Acquire shares or capital contributions from an existing shareholder in the target (for example, a joint stock company, limited liability company, and so on).
• Subscribe for newly issued shares of the target (for a joint stock company).
• Make further capital contributions to the target (for a limited liability company).
In the case of an asset deal, a foreign purchaser must generally establish a new subsidiary in Vietnam.
In addition, M&A transactions can also take the form of a merger. One or more companies of the same type can be merged into another company by transferring all assets, rights, obligations and interests to the merged company, terminating the existence of the merging company.
The 2014 Enterprise Law sets out the types of business structuring that can be used by investors as a result of M&A transactions. In addition, the 2014 Investment Law is the first law that regulates M&A transactions and clearly provides that such transactions do not require an investment registration certificate. Now, the foreign investors must seek approval from the local Department of Planning and Investment of the transaction if the:
• Target company operates in conditional business sectors applicable for foreign investors.
• Investment leading to foreign ownership of the target company is 51% or more (in particular, from below 51% to more than 51% and from 51% to above 51%).
In other cases, the target company only needs to register a change of membership/shareholding at the Business Registration Division. This change has ended years of uncertainty and frustration faced by foreign investors seeking entry into the Vietnam market or expansion through M&A transactions.
The level/extent of private equity-backed bids in the past 12 months
Investment in the form of M&A transactions is still the most popular form compared with private equity investment. In recent months, private equity funds have been following the securities market in Vietnam, especially companies carrying out value chain operations. Consumer goods and infrastructure are the sectors that attract the most attention. However, due to limited publicly available information, it is not possible to fully assess the level of private equity-backed bids.
The approach of the competition regulator(s) in the past 12 months
The Vietnam Competition Authority under the Ministry of Industry and Trade (VCA) must be notified of the transaction if participating companies have a combined market share in the relevant market of 30% up to 50%. The VCA will then examine whether the calculation of the combined market share is correct and whether the transaction is prohibited (that is, whether the combined market share exceeds 50%, except in certain cases). The transaction can be conducted when the VCA issues a written confirmation that the transaction is not prohibited under competition law.
In recent Grab buying Uber case in South East Asia, the VCA has started its investigation of possible violation of Vietnam’s Competition Law. The case is still at the examination stage.
For more information on the VCA, see www.vca.gov.vn/Default.aspx?lg=2.
Main factors affecting the public M&A market over the next 12 months
The country’s deeper and wider integration into the world’s economy is offering new opportunities for M&A activities.
Another factor includes the high pressure faced by the government to privatise state-owned enterprises to meet requirements under signed trade pacts, especially the EU – Vietnam Free Trade Agreement, which is expected to come into force in 2019.
Encouraging signs for foreign investment include:
• Reformed policies to allow wider access to foreign investors.
• ASEAN Economic Community single market and production base.
• The conclusion of free trade agreements (FTAs), including the EU – Vietnam FTA and The Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
• Vietnam’s super rich population is growing faster than anywhere else and is on track to continue leading the growth in the next decade.
• Equitization of state-owned enterprises will speed up.
The introduction of the new Investment Law, Enterprise Law, Resolution No. 42 on handling bad debts and other laws and policies are creating an improved legal environment for investment and trade in general, and the M&A market in particular. However, the following factors also affect M&A transactions:
• Divergent interpretations and implementations by local licensing authorities of international treaties such as Vietnam’s WTO Commitments.
• Different licensing procedures applied to different types of transactions (for example, for foreign invested companies and domestic companies, public companies and private companies, and for buying state-owned shares or private shares).
Although legal and governance barriers, along with macro instability and the lack of market transparency are still the greatest concerns for investors, M&A deals in Vietnam are still expected to be one of the key, effective channels for market entry.
The major expected trends in the Vietnam M&A market include:
• Bank restructurings.
• Acquisitions and anti-acquisitions, particularly in the real estate sector.
• Growing Japanese and Thai investment in Vietnam through M&A transactions.
• Reform of SoEs.
***
Please do contact the author Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam.

Discussion at this year’s Vietnam M&A Forum, which took place earlier this month in Ho Chi Minh City, revolved around the challenges facing Vietnam’s M&A market and the need for a big push to maintain the momentum of previous years.

As of this month, deals have fallen short of the record levels in 2016, and surpassing the US$5.8 billion total looks like a tall order. Although impressive, last year’s figure represented just 5% of Southeast Asia’s total M&A activity, with Singapore alone claiming over 50%. Additionally, 64% of the deals in Vietnam were valued at less than US$20 million. While 77% of the deals were domestic, Thai firms were the biggest foreign buyers in terms of value, enacting aggressive takeovers of major Vietnamese firms in retail and consumer goods. In terms of quantity most deals came from Singapore and Japan.

With advantages of proximity in terms of geography, culture, and climate, Thai firms have sought to penetrate the growing Vietnamese market quickly. Alongside other neighbouring nations who have struggled as their home markets mature, they have increasingly sought high-growth or low-production-cost economies for expansion elsewhere.

There is a lot to celebrate, but the total value of M&A activity reached just US$1.1 billion in the first quarter of 2017, a drop of 24.4 percent year-on-year. A slowdown in the State’s equitisation process is partially to blame for the drop, and many of the speakers at the M&A Forum expressed the need for a big push in the second half of the year.

Trains, planes and automobiles

To continue the high rate of economic growth achieved over the past few years, the Ministry of Planning and Investment (MPI) concluded that Vietnam is in dire need of M&A investment in the infrastructure sector. Deals need to come in thick and fast across many branches of the economy, with roads, railways, airports and seaports needing upgrades to meet international standards, in addition to the continued expansion of the country’s real estate and retail conglomerates.

As well as the increased divestments of State-owned enterprises, Vietnam’s administrative policy framework will need to be improved to attract and accommodate foreign investors.

Banking on big deals

Besides recent prime ministerial decisions regarding the SOE equitisation process, the government has made a priority of dealing with non-performing loans. This in particular could mean big news for M&A activity in the banking sector.

A resolution was recently adopted by the country’s National Assembly, with the State Bank of Vietnam (SBV) aiming to reduce the ratio of non-performing loans (NPLs) to below 3 percent by 2020. As part of the resolution, credit institutions, foreign entities and bad debt trading institutions will be able to buy and sell bad debts in an open and transparent way.

The move has had a positive impact on banking shares, and recent reports suggest that South Korea’s Shinhan Bank is poised to acquire a financial institution in Vietnam, following its takeover of ANZ Vietnam’s retail business. Two Japanese investors are also negotiating the purchase of stakes in two different Vietnamese financial institutions.

Moves like these show that foreign firms appreciate the potential of Vietnamese consumer finance, especially with attempts to unburden the system of its bad debt. StoxPlus, a leading financial and business information corporation in Vietnam, valued the market in 2016 at US$26.55 billion, with an annual growth rate of 30-40%.

Japan’s interest is good news for Vietnam’s budding financial sector, which could do with an injection of experience from more established players.

So, there is reason to be optimistic. However, participants at the M&A Forum stressed that foreign-ownership limits and the lack of clear regulations in areas attractive to big investors are still obstacles to fulfilling the country’s potential.

Dearth of details

Foreign investors often bring up the subject of transparency, which remains a big issue. The opaque investment environment can complicate negotiations in Vietnam, and this is particularly true when dealing with equitised state-owned enterprises. Investors are required to make substantial upfront commitments in terms of time and money at the early stages of the bidding process, shouldering significant risks to enter the market.

Used to dealing with more sophisticated operations, the financial statements of Vietnamese companies can also fall short of investors’ expectations. There is certainly a need for advisors and consultants, who can help with valuations and due diligence, offsetting some of the risk involved.

Until Vietnamese firms grow large enough to regularly participate in substantial cross-border M&A deals, foreign partners will need to make sufficient preparations when it comes to tax and legal requirements. Over time, Vietnamese companies will become more aware of the requirements set forward by investors in M&A transactions, which will generate more deal flow as well as shorten the transaction process.

Cause for cautious optimism

These complaints aside, the overall impression at the M&A Forum was positive, with some predicting that M&A activities in Vietnam would double or triple over the next five to ten years. With some adjustments it’s certainly possible to surpass 2016’s deal value in the short term, especially if the growth of the consumer retail sector continues to attract the attention of Korean investors. Raising the foreign-ownership limits in Vietnamese banks could also prove to be a tipping point for some big transactions.

To maintain momentum over the long term, however, more significant adjustments will be needed. The issues of equitising SOEs, state divestment and the foreign ownership cap will become more urgent as time goes on. The government will need to respond to suggestions and support legal reforms if the country is to attract more M&A capital. Crucially, the efficiency and transparency of the M&A market will need to be improved for foreign investors. Policymakers have promised that further legal reforms are underway and the government is pushing forward with state divestment. Let’s hope they keep to their commitments.

For more information about M&A in Vietnam, please contact Giles at GTCooper@duanemorris.com or any of the lawyers in our office listing. Giles is co-General Director of Duane Morris Vietnam LLC and branch director of Duane Morris’ HCMC office.

Globally, 2017 has been an unpredictable year for the mergers and acquisitions (M&A) market, with the hangover of political and economic instability from 2016 inspiring caution among investors.

Foreign investment has been put on the back foot due to rising protectionism and the failure of promising free trade deals like the TPP (Trans-Pacific Partnership). Vietnam in particular has suffered and will need some big breakthroughs to regain lost momentum.

Although the TPP would have brought some big benefits to Vietnam, it is expected that other trade deals on the horizon will make up most of the shortfall. The nation has joined six regional FTAs as an ASEAN member, including the ASEAN Free Trade Area (AFTA) and the five FTAs between ASEAN and China, Japan, South Korea, India, Australia and New Zealand, as well as four bilateral FTAs with Chile, Japan, South Korea and the Eurasia Economic Union (EAEU). Negotiations over an FTA with the European Union (EU) have also been concluded.

Sluggish start

Whereas 2016 was an exciting year for M&A in Vietnam, 2017 has gotten off to a slower start. According to a report released in advance of the M&A Forum (August 10, HCMC), deals in Vietnam hit an all-time record of US$5.8 billion in 2016, a growth of 11.92 percent compared to 2015. However, the market has slumped since the latter half of last year with fewer headline signings. The total value of M&A activity reached just US$1.1 billion in the first quarter, a drop of 24.4 percent year-on-year.

In Vietnam, M&A transactions usually take the form of either share or asset acquisitions, with share acquisition transactions outnumbering asset acquisition transactions.

Share acquisitions by foreign purchasers are commonly structured as offshore direct investments. The new investor can:

Acquire shares or capital contributions from an existing shareholder in the target (for example, a joint stock company, limited liability company, and so on).

Subscribe for newly issued shares of the target (for a joint stock company).

Make further capital contributions to the target (for a limited liability company).

In the case of an asset deal, a foreign purchaser must generally establish a new subsidiary in Vietnam.

In addition, M&A transactions can also take the form of a merger. One or more companies of the same type can be merged into another company by transferring all assets, rights, obligations and interests to the merged company, terminating the existence of the merging company.

The 2014 Enterprise Law sets out the types of business structuring that can be used by investors as a result of M&A transactions. In addition, the 2014 Investment Law is the first law that regulates M&A transactions and clearly provides that such transactions do not require an investment registration certificate. Now, the foreign investors must seek approval from the local Department of Planning and Investment of the transaction if the:

Target company operates in conditional business sectors applicable for foreign investors.

Investment leading to foreign ownership of the target company is 51% or more (in particular, from below 51% to more than 51% and from 51% to above 51%).

In other cases, the target company only needs to register a change of membership/shareholding at the Business Registration Division. This change has ended years of uncertainty and frustration faced by foreign investors seeking entry into the Vietnam market or expansion through M&A transactions.

The level/extent of private equity-backed bids in the past 12 months

Investment in the form of M&A transactions is still the most popular form compared with private equity investment. In recent months, private equity funds have been following the securities market in Vietnam, especially companies carrying out value chain operations. Consumer goods and infrastructure are the sectors that attract the most attention. However, due to limited publicly available information, it is not possible to fully assess the level of private equity-backed bids.

The approach of the competition regulator(s) in the past 12 months

The Vietnam Competition Authority under the Ministry of Industry and Trade (VCA) must be notified of the transaction if participating companies have a combined market share in the relevant market of 30% up to 50%. The VCA will then examine whether the calculation of the combined market share is correct and whether the transaction is prohibited (that is, whether the combined market share exceeds 50%, except in certain cases). The transaction can be conducted when the VCA issues a written confirmation that the transaction is not prohibited under competition law.

The country’s deeper and wider integration into the world’s economy is offering new opportunities for M&A activities.

Another factor includes the high pressure faced by the government to privatise state-owned enterprises to meet requirements under signed trade pacts, especially the EU – Vietnam Free Trade Agreement, which is expected to come into force in 2019.

Encouraging signs for foreign investment include:

Reformed policies to allow wider access to foreign investors.

Formation of the ASEAN Economic Community at the end of 2015.

The conclusion of free trade agreements (FTAs).

Vietnam’s super rich population is growing faster than anywhere else and is on track to continue leading the growth in the next decade.

Equitization of state-owned enterprises will speed up.

The introduction of the new Investment Law, Enterprise Law and other laws and policies are creating an improved legal environment for investment and trade in general, and the M&A market in particular. However, the following factors also affect M&A transactions:

Divergent interpretations and implementations by local licensing authorities of international treaties such as Vietnam’s WTO Commitments.

Different licensing procedures applied to different types of transactions (for example, for foreign invested companies and domestic companies, public companies and private companies, and for buying state-owned shares or private shares).

Although legal and governance barriers, along with macro instability and the lack of market transparency are still the greatest concerns for investors, M&A deals in Vietnam are still expected to be one of the key, effective channels for market entry.

The major expected trends in the Vietnam M&A market include:

Bank restructurings.

Acquisitions and anti-acquisitions, particularly in the real estate sector.

Growing Japanese and Thai investment in Vietnam through M&A transactions.

Reform of SoEs.

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Please do contact the author Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam.

FDI capital has been rising in the past few years. In the first 6 months of 2017, the total FDI capital to Vietnam is USD19.2 billion, an increase of 54.8% compared to the same period last year. Vietnam’s M&A market continues to be active in 2017 after reaching a record-breaking deal value of USD5.8 billion in 2016. The number of M&A deals amounts to 2,062 deals worth USD1.8 billion from January – May 2017, up 116.2% compared with the statistics last year.

Real estate continues to be the most attractive sector, with hundreds of millions of USD waiting to be poured into the market via M&A, especially in residential, offices, retail, hotel and industrial park segments. Main investors still come from Japan, Korea, Singapore, and particularly a rising number of investors from China recently. The retail, consumer goods, and industrial goods are also very active, with M&A deals accounting for 53% of total deals in 2016. This is partly due to an attractive market of about 93 million people with high purchasing power.

Notable deals in 2016 and first half of 2017 include the following:

Central Group (Thai Group) bought BigC Vietnam at USD1.1 billion

TTC Holdings (Thailand) bought Metro Vietnam at USD710 million

In March 2017, Siam City Centre bought 65% of Holcim Vietnam from LafargeHolcim at USD524 million

In December 2016, Fraser & Neave ( a Singaporean beverage company) bought 5.4% of Vinamilk’s shares at USD500 million

Note: Owner of Fraser & Neave is also owner of TTC Holdings

In January 2016, Mobifone bought 95% of AVG’s shares at USD400 million

Leading companies in the sectors are main target of foreign investors. They have the advantage of holding strong brands, strong market share or controlling significant natural resources.

We hope that the M&A will continue its trend when the Government speeds up the equitization of many state-owned enterprises, especially in power, infrastructure and telecommunication sectors. Experts forecast the total value of M&A deals in 2017 will reach up to USD6.2 -6.5 billion.

How to obtain control of a public company

The most common means of obtaining control over a public company are as follows:

The acquisition of shares/charter capital through:

buying shares/charter capital from the existing shareholders of the company;

buying shares/charter capital of a listed company on the stock exchange; and

public share purchase offer.

Through a merger. The 2014 Law on Enterprises sets out the procedures for company mergers by way of a transfer of all lawful assets, rights, obligations and interests to the merged company, and for the simultaneous termination of the merging companies.

Through the acquisition of assets.

There are restrictions on the purchase of shares/charter capital of local companies by foreign investors in certain sensitive sectors. In addition, the law is silent on merger or assets acquisition (e.g., business spin-off) transactions where a foreign investor is a party. Regarding other assets acquisition transactions, if the asset is a real property, foreign ownership right will be restricted according to real estate laws.

Securities of public companies must be registered and deposited at the Vietnam Securities Depository Centre before being traded.

Depending on the numbers of shares purchased, an investor can become a controlling shareholder. Under the Vietnam Law on Securities, a shareholder that directly or indirectly owns 5% or more of the voting shares of an issuing organization is a major shareholder. Any transactions that result in more than 10% ownership of the paid-up charter capital of the securities company must seek approval of the State Securities Commission (SSC).

What a bidder generally questions before making a bid

Before officially contacting the potential target, the bidder conducts a preliminary assessment based on publicly available information. The bidder then contacts the target, expresses its intention of buying shares/subscribing for its shares and the parties sign a confidentiality agreement before the due diligence process. The confidentiality agreement basically includes confidentiality obligations in performing the transaction. The enforcement of confidentiality agreements by courts in Vietnam remains untested.

A bidder’s legal due diligence usually covers the following matters:

Corporate details of the target and its subsidiaries, affiliates and other companies that form part of the target.

Contingent liabilities (from past or pending litigation).

Employment matters.

Contractual agreements of the target.

Statutory approvals and permits regarding the business activities of the target.

Founding shareholders can only transfer their shares to other founding shareholders of the company within three years from the issuance of the Enterprise Registration Certificate. After then, the shares can be transferred freely. An internal approval of the general meeting of shareholders is always required if:

The company increases its capital by issuing new shares.

There is any share transfer of the founding shareholders within the above three-year period.

If the sale and purchase is a direct agreement between the company and the seller in relation to an issuance of shares, the selling price must be lower than the market price at the time of selling, or in the absence of a market price, the book value of the shares at the time of the approval plan to sell the shares. In addition, the selling price to foreign and domestic buyers must be the same.

When a tender offer is required

A tender offer is required in the following cases:

Purchase of a company’s circulating shares that results in a purchaser, with no shareholding or less than a 25% shareholding, acquiring a 25% shareholding or more.

Purchase of a company’s circulating shares that results in a purchaser (and affiliated persons of the purchaser), with a 25% or more shareholding, acquiring a further 10% or more of circulating shares of the company.

Purchase of a company’s circulating shares that results in a purchaser (and affiliated persons of the purchaser), with a 25% shareholding or more, acquiring a further 5% up to 10% of currently circulating shares of the company within less than one year from the date of completion of a previous offer.

There is no guidance on building a stake by using derivatives. In addition, the bidder cannot purchase shares or share purchase rights outside the offer process during the tender offer period.

The bidder must publicly announce the tender offer in three consecutive editions of one electronic newspaper or one written newspaper and (for a listed company only) on the relevant stock exchange within seven days from the receipt of the State Securities Commission’s (SSC’s) opinion regarding the registration of the tender offer. The tender offer can only be implemented after the SSC has provided its opinion, and following the public announcement by the bidder.

Making the bid public

The offer timetable is as follows:

The bidder prepares registration documents for its public bid to purchase shares.

The bidder sends the bid registration documents to the SSC for approval and, at the same time, sends the registration documents to the target.

The SSC reviews the tender documents within seven days.

The board of the target must send its opinions regarding the offer to the SSC and the shareholders of the target within 14 days from receipt of the tender documents.

The bid is announced in the mass media (although this is not a legal requirement).

The length of the offer period is between 30 and 60 days.

The bidder reports the results of the tender to the SSC within 10 days of completion.

Companies operating in specific sectors (such as banking, insurance, and so on) can be subject to a different timetable.

Offer conditions

A takeover offer usually contains the following conditions:

The terms and conditions of the offer apply equally to all shareholders of the target.

The relevant parties are allowed full access to the tender information.

The shareholders have full rights to sell the shares.

Applicable laws are fully respected.

An offer can also be subject to conditions precedent. Conditions precedent are set out in the share sale and purchase agreement or the capital contribution transfer agreement. There is no specific restriction on conditions precedent other than the requirement that they cannot be contrary to law and conflict with social ethics (although the legal definition of social ethics is unclear). The most common conditions precedent are:

Amendments to the charter/relevant licence of the target.

Obtaining necessary approvals to conduct the transaction.

Changes to the target’s management body.

Payment of the contract price will only be made after the conditions precedent are met.

Employee consultation

There is no requirement under Vietnamese law that the employees must be consulted about the offer. However, if a layoff is to be conducted, the employer must:

Prepare a labour usage plan.

Consult with the employee representative.

Notify the competent labour authority on the implementation of the labour usage plan.

When a tender offer is required?

A tender offer is required in the following cases:

Purchase of a company’s circulating shares that results in a purchaser, with no shareholding, or less than a 25% shareholding, acquiring a 25% shareholding.

Purchase of a company’s circulating shares that results in a purchaser (and affiliated persons of the purchaser), with a 25% or more shareholding, acquiring a further 10% or more of circulating shares of the company.

Purchase of a company’s circulating shares that results in a purchaser (and affiliated persons of the purchaser), with a 25% shareholding or more, acquiring a further 5% up to 10% of currently circulating shares of the company within less than one year from the date of completion of the previous offer.

Form of consideration and minimum level of consideration

Under Vietnamese law, shares can be purchased by offering cash, gold, land use rights, intellectual property rights, technology, technical know-how or other assets. In practice, acquisitions are most commonly made for cash consideration.

In cases of full acquisition of state-owned enterprises, the first payment for the share purchase must not be less than 70% of the value of such shares, with the remaining amount being paid within 12 months.

In transactions involving auctions of shares by state-owned enterprises, the purchaser must make a deposit of 10% of the value of the shares registered for subscription based on the reserve price at least five working days before the auction date included in the target company’s rule. Additionally, the purchaser must transfer the entire consideration for the shares into the bank account of the body conducting the auction within ten working days of the announcement of the auction results.

In the case of a public tender offer, the payment and transfer of shares via a securities agent company appointed to act as an agent for the public tender offer must comply with Decree 58/2012/ND-CP.

Delisting a company

If a company seeks voluntarily de-listing, it must submit an application for de-listing that includes the following documents:

A request for de-listing.

For a joint stock company:

the shareholders’ general meeting approval of de-listing of the stock;

the board of directors’ approval of de-listing of bonds; and

the shareholders’ general meeting approval of de-listing of convertible bonds.

The members’ council (for a multi-member limited liability company) or the company’s owner (for a single member limited liability company) approval of de-listing of bonds.

For a securities investment fund, the investors’ congress approval of de-listing of the fund’s certificate.

For a public securities investment company, the shareholders’ general meeting approval of stock de-listing.

A listed company can only de-list its securities if de-listing is approved by a decision of the general meeting of shareholders passed by more than 50% of the voting shareholders who are not major shareholders.

If a company voluntarily de-lists from the Hanoi Stock Exchange or Ho Chi Minh Stock Exchange, the application for de-listing must also include a plan to deal with the interests of shareholders and investors. The Hanoi Stock Exchange or Ho Chi Minh Stock Exchange must consider the request for de-listing within ten and 15 days from the receipt of a valid application, respectively.

Transfer duties payable on the sale of shares in a company

Depending on whether the seller is an individual or a corporate entity, the following taxes will apply:

Capital gains tax. Capital gains tax is a form of income tax that is payable on any premium on the original investor’s actual contribution to capital or its costs to purchase such capital. Foreign companies and local corporate entities are subject to a corporate income tax of 20%. However, if the assets transferred are securities, a foreign corporate seller is subject to corporate income tax of 0.1% on the gross transfer price.

Personal income tax. If the seller is an individual resident, personal income tax will be imposed at the rate of 20% of the gains made, and 0.1% on the sales price if the transferred assets are securities. An individual tax resident is defined as a person who:

stays in Vietnam for 183 days or longer within a calendar year;

stays in Vietnam for a period of 12 consecutive months from his arrival in Vietnam;

has a registered permanent residence in Vietnam; or

rents a house in Vietnam under a lease contract of a term of at least 90 days in a tax year.

If the seller is an individual non-resident, he is subject to personal income tax at 0.1% on the gross transfer price, regardless of whether there is any capital gain.

Payment of the above transfer taxes is mandatory in Vietnam.

Regulatory approvals

The investor will need to register the capital contribution and purchase of shares if either:

The target is operating in one of the 267 conditional sectors referred to in the 2015 Investment Law.

The capital contribution and purchase of shares results in foreign investors owning 51% or more of the target’s charter capital (in particular, from below 51% to more than 51% and from 51% to above 51%).

The local Department of Planning and Investment where the target is located must issue its final approval within 15 days from the receipt of a valid registration application. However, in practice, this procedure can take several months due to the workload of certain central authorities and the lack of clear guidance documents. Therefore, the registration requirement can cause substantial delays to the whole M&A process.

In other cases, the target company only needs to register change of membership / shareholders at the Business Registration Division.

Restrictions on repatriation of profits and/ or foreign exchange rules for foreign companies

If the target company in Vietnam already has an investment registration certificate, it must open a direct investment capital account at a licensed bank in Vietnam. Payment for a share purchase by a foreign investor must be conducted through this account. The account can be denominated in Vietnamese dong or a foreign currency. In addition, if the foreign investor is an offshore investor, it will also need to open a capital account at a commercial bank operating in Vietnam to carry out the payment on the seller’s account and receive profits.

If the target company in Vietnam does not have an investment registration certificate, the foreign investor will need to open an indirect investment capital account for payment to the seller and remittance of profits.

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Please do contact the author Dr. Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Dr. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

Foreign investors can now proceed with more certainty when setting up logistic companies or acquiring stakes from Vietnamese partners. Logistics is an area where discrepancies between international treaties and domestic law implementation have caused many headaches. However, Vietnam’s Ministry of Industry and Trade (MOIT) has recently provided more clarity through a guiding regulation (Circular No. 9911/BCT-KH) and a number of official letters, including responses to the Ho Chi Minh City People’s Committee and the Vietnam Business Forum. At the same time, a few Japanese logistics companies have established 100% foreign-invested subsidiaries in Vietnam.

International treaties should supersede national law, and official comments from MOIT have restated that view. So, we initially refer to Vietnam’s WTO service sector commitments (WTOSSC) in most cases. Accordingly, some sectors are open to 100% foreign investment (e.g., warehousing and freight forwarding), while some still require Vietnamese equity participation (e.g., container handling).

As a foreign buyer in an M&A case, besides the purchases price and other conditions, we recommend to consider and differentiate between absolutely essential and optional business lines as well as the best case and acceptable levels of ownership in the target.

Yamato Logistics and Sagawa Express have established 100% foreign-invested subsidiaries in Vietnam. This is possible through strategically limiting business lines to those that are open to 100% foreign investment.